4 Best Auto Stocks For 2014

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 |  Includes: F, GM, TM, VLKAY
by: Adnan Riaz

Summary

Global auto sales are expected to increase this year.

China is the next growth market for these automakers.

Europe’s automobile industry is expected to grow this year.

This is attractive for dividend investors.

2013 was a good year for automakers. Last year, shares of Toyota Motor (NYSE:TM), General Motors (NYSE:GM), Ford Motor (NYSE:F), and Volkswagen AG (OTCPK:VLKAY) jumped 28%, 40%, 18% and 23%, respectively. Vehicle sales are growing quickly across the globe, as a result, the future of these automakers looks bright to me.

For the first time in history, global auto sales crossed the 80 million vehicle threshold last year. In 2013, a total of 82.84 million vehicles were delivered worldwide, a 4.2% increase compared to 2012. Auto sales in the U.S increased 7.6% to 15.6 million units. Toyota Motor retained its crown as the world's best-selling automaker by selling 9.9 million units last year. Volkswagen occupied the second place with 9.73 million units and General Motors is third with 9.71 million. Toyota predicted that it will cross the 10 million milestone this year. Toyota estimated that its sales will rise to 10.32 million units in 2014, representing growth of 4% from last year. Germany's Volkswagen has pledged to surpass General Motors and Toyota to become the world's largest automaker by 2018.

Looking at the future, global auto sales are forecast to reach 85 million units in 2014. IHS automotive predicted that the sales will cross 100 million units by 2018. Deutsche Bank estimates global auto sales will grow 4% this year to 87.4 million vehicles. IHS automotive estimated that the U.S. auto market will grow 2.4% to 16.03 million units in 2014. In contrast, Deutsche Bank estimated a 3% expansion in U.S. auto sales to about 16.1 million units. Deutsche Bank expects that the U.S. economy will grow 3% this year, and that will give Americans $319 billion in additional disposable income. It predicts about $13 billion of that sum will be spent on new cars.

Like the U.S., China has also become a major market for automakers. It is the next growth market for automakers. China is not only the world's largest automobile market, but is also the fastest growing auto market in the world. Auto sales in the country surged 14% to 21.98 million units last year. Passenger vehicle sales increased 15.7% year-on-year to 17.93 million units. All the major automakers saw record sales in the country in 2013. General Motors sold 3.16 million vehicles in China last year, up 11.4% from 2012. Ford sold 935,183 vehicles, up 49% from 2012. Toyota's sales climbed 9.2% to a record 917,500 units and forecast deliveries will climb to more than 1.1 million this year.

Auto sales in China are expected to reach 24 million units in 2014. LMC Automotive forecasts an increase of 11% this year in the country's overall automobile market, while IHS Automotive predicts demand to grow 9%. Sales of passenger vehicles are likely to increase 9% to 11% this year.

Major automakers are expanding their presence in China to benefit from this growing market. General Motors plans to invest $11 billion in China by 2016. China is vital for General Motors, as it sells more vehicles in China than any other country, including the U.S. The company will launch 19 new models and redesigns in China this year, and focus on sales of Chinese consumers' favorite brands such as Buick, Chevrolet and Cadillac.

Like General Motors, Ford is also planning to invest $5 billion in China as part of a plan to double its production capacity by 2015. Ford's management dubbed its Chinese investments as its largest industrial expansion in at least 50 years. While Ford sales are increasing in China, the company is still struggling to understand the small but major differences in preferences the Chinese consumer has compared to the American consumer.

Volkswagen will invest more than $15 billion in China by 2015. It is building seven new plants in China to increase its annual production capacity from the present figure of 2.6 million units to more than 4 million units per year in 2018. By 2018, the company will increase its workforce from 75,000 to 100,000 people.

Looking at Europe, the auto market is set to grow in 2014 after its six-year slump. Full-year sales in Europe fell 1.8% in 2013 to 12.3 million vehicles, the lowest figure since 1995. Vehicle sales in the region are expected to rise 3% this year.

Growing auto sales will benefit all the above-mentioned automakers. I have evaluated the financial performance of these automakers to help investors to choose the best one.

TM

GM

F

VLKAY

Industry Avg.

Market Cap.

$186.3 B

$53 B

$63.52 B

$120.13 B

$1.91 B

P/E [ttm]

9.49

14.27

9.13

9.94

15

Forward P/E

9.09

7

8.43

7.42

N/A

EPS [ttm]

11.43

2.38

1.76

5.16

N/A

Price/Sales

0.76

0.35

2.40

0.44

1.50

Price/Book

1.26

1.20

2.35

0.98

3.16

Operating margin

9.40%

4.60%

3.80%

5.92%

14.3%

Profit margin

7.20%

4.90%

4.90%

4.64%

12.02%

Qtrly Revenue Growth [yoy]:

23.80%

2.10%

3.70%

6%

4.55%

Qtrly Earnings Growth [yoy]:

423%

-18.50%

87.50%

42.30%

N/A

Return on Assets [ttm]

4.90%

4.70%

3.60%

2.89%

10.04%

Return on Equity [ttm]

14%

24.60%

34.20%

10.96%

22.37%

Current ratio

1

1.30

N/A

1.03

1.30

Debt/Equity ratio

115x

92x

435x

143x

79x

Dividend Yield

2.18%

3.53%

3.11%

2.17%

2.45

Payout ratio

22%

N/A

22.10%

20.64%

3.02%

Beta

0.72

1.70

1.52

1.31

1.24

Click to enlarge

Source: Finviz

Looking at profitability ratios, Toyota Motor has the highest operating and profit margin ratio among the four. Also, its quarterly revenue and earnings growth is much higher than General Motors, Ford and Volkswagen. Toyota has the lowest while General Motors has the highest beta figure. High-beta stocks are supposed to be riskier but provide a potential for higher returns; low-beta stocks pose less risk but also lower returns.

General Motor has the highest current ratio and lowest debt/equity ratio among the four. A higher current ratio means the company is more capable of paying its obligations. A lower debt/equity ratio means that a company is using less leverage and has a stronger equity position.

All the four automakers are also attractive for dividend investors. Toyota is paying a nice dividend, and has an attractive dividend yield of 2.18%. But it does not compare favorably to automakers like Ford and General Motors, who pay dividend yields of 3.53% and 3.11% respectively. Looking at Price/Sales and Price/Book ratio, General Motors and Volkswagen seems cheap stocks to buy.

Bottom Line

The automobile sector is very attractive at the moment; all the participants are experiencing a healthy growth in sales. As the global auto market is expected to grow this year, the above-mentioned automakers will deliver solid returns to their investors. These automakers are expanding their presence in China, where they have high growth opportunities. Also, they are attractive for dividend investors. In my opinion, these auto stocks are attractive investments for long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.